Japan Global Payroll and Tax Information Guide
Japan is an island country in East Asia. The kanji that make up Japan’s name mean “sun origin”, and it is often called the “Land of the Rising Sun”. Japan is the world’s 4th largest island country and encompasses about 6,852 islands. The capital is Tokyo.
The country is divided into 47 prefectures in 8 regions and is the 2nd most populous island country. Its economy is the world’s 3rd-largest by nominal GDP and the 4th-largest by purchasing power parity. It is also the world’s 4th-largest exporter and importer.
The “Land of the Rising Sun” benefits from a highly skilled and educated workforce- it has among the world’s largest proportion of citizens holding a tertiary education degree.
Japan is a highly developed country with a very high standard of living and Human Development Index. Its population enjoys one of the highest life expectancy and the 3rd lowest infant mortality rate in the world, but is experiencing issues due to an aging population and low birth rate.
As of 2019, Japanese citizens had visa-free or visa-on-arrival access to 189 countries and territories, ranking the Japanese passport 1st in the world, tied with Singapore.
Ease of doing business in Japan
Japan is ranked 39th among 190 economies in the ease of doing business, according to the latest edition of the World Bank Group’s Doing Business 2019: Training for reform report.
*Japan’s performance in the latest Doing Business report
Japan is a land of contrasts- technologically innovative and modern yet traditional and hierarchical. Japan boasts excellence in sectors as wide-ranging as finance, automotive, computing and pharmaceuticals and is viewed as a major global influence – even despite the recent economic rise of China and India. The county is deemed as “mostly free” in terms of economic freedom, with businesses able to operate without the hindrance of excessive government controls.
However, despite the World Bank’s assessment economic challenges arise as the country faces a low-birth date, an ageing population and lack of reform. It is important to note that steps taken through the Japanese government’s “Abenomics” policy, based upon the three key aspects of monetary easing, fiscal stimulus and structural reforms, have made a positive impact on deflation.
Japan Payroll– Basic Facts
The official currency is the Japanese Yen (¥). Japan legally recognizes bitcoin as a legal method of payment. However, the Japanese Financial Service Agency considers bitcoin to be an asset or commodity rather than a legal currency.
There are four most common business structures in Japan. Setting up your payroll will depend on the type of corporate structure which is used:
- Godo-Kaisha – operates in a similar manner to an American LLC (or “limited liability company”) setup
- Goshi-Kaisha – a “limited partnership”’ company
- Gomei-Kaisha – a “general partnership company”
- Kabushiki-Kaisha – the most popular business structure. It is the Japanese version of incorporation.
Any company seeking to pay employees in Japan must have a bank account in Japan. Employers are responsible for withholding income taxes and social taxes from each employee’s salary payment. Additionally, employers make a “year-end adjustment” for most employees, which eliminates the need for the employee to file tax return.
The tax year in Japan for individual taxpayers is from January 1st to December 31st. For individuals tax returns and any payments owed are due by March 15th.
Tax and Social Security Considerations
The national standard corporation tax rate of 23.2% applies to ordinary corporations with share capital exceeding ¥ 100 million.
Individual Income Tax
Japan’s individuals income tax system combines a self-assessment system with a withholding system that requires withholding agents (payers of salaries and wages, retirement allowance, interest, dividends and fees) to withhold tax at the time of payment and remit it to the National Tax Agency (NTA).
For tax purposes, individuals living in Japan are classified as:
- Permanent residents – either lived in Japan for at least five years or intends to live in Japan permanently. Permanent Residents pay taxes on their worldwide income.
- Nonpermanent residents – lived in Japan for less than five years but does not intend to live in Japan permanently. Non-permanent residents pay taxes on all income except income from other countries that are not remitted to Japan.
- Nonresidents – lived in Japan for less than a year and does not have a primary base of living in Japan. Nonresidents pay taxes on income from sources in Japan but not on income from other countries.
Japan’s personal income tax rates for residents for 2019:
The Sales Tax Rate in Japan stands at 8%.
- Dividends – 20%
- Interest – 15-20%
- Royalties – 20%
- Rents (from real properties) – 20%
Social security law requires contributions to national social and labor insurance systems in respect of employees in Japan. Categories of social security include health, welfare and labor insurance.
Employer and employee contributions generally align with the exception of labor insurance.
Two programs provide health insurance: national health insurance and employees’ health insurance.
- Employee Social Security – The rate is 14.7% for employees attaining age 40.
The general breakdown is as follows:
- welfare insurance – 9.150% capped at ¥ 56,730 a month
- health insurance – 4.950% capped at ¥ 68,805 a month
- employment insurance – 0.6% uncapped
- Employer Social Security – Employer social security has several components and can vary by employer and/or age of employee. The rate is 15.485% for employees under age 40.
The general breakdown is as follows:
- welfare insurance – 9.150% capped at ¥ 56,730 a month;
- health insurance – 5.735% capped at ¥ 79,716 a month;
- employment insurance – 0.6% uncapped
Local inhabitant tax is made up of prefectural tax (4%) and municipal tax (6%).
Other taxes include registration and license taxes. Share registration tax is assessed at 0.7% on the registration of new or additional share capital.
Compensation and Benefits
Minimum wage: The minimum wages are set for its 47 prefectures and for some industries within the prefectures.
Wage payment: Usually Japanese workers receive monthly wages. Employers must issue a pay slip stating the amount of the monthly salary and the amount of tax withheld at the time of payment.
Hours of work: Set at no more than 40 hours per week, with no more than 8 hours of work per day.
Overtime: If an employee works over 40 hours a week then the company is expected to pay for overtime to the employee unless they work in Management position. Japanese companies that intend to use overtime on a regular basis should put in place a written agreement between employees and management commonly called “article 36″ and submit it to Labour Standards Inspection Office.
Holidays: There are 15 public holidays in Japan. See the full list with holidays in Japan in 2019.
- Paid leave: Permanent and contract employees are entitled to a minimum of 10 days paid leave per annum after 6 months rising to 20 days with more than 6-and-a-half years’ of service. This allowance can be pro-rated for partial years worked. Compared to the UK this may sound like a very small amount of leave, but there are also no fewer than 15 days of public holidays in Japan every year, plus many companies shut down for a statutory period of several days in the summer or during the New Year.
- Sick leave: In general, there is no sick leave rights in Japan. When employees get sick, they use their paid vacation to take leave of absence. Some foreign companies grant sick leave to their employees as a special benefit.
- Maternity leave: Guaranteed maternity leave in Japan covers a period of 6 weeks prior to the expected birth date to 8 weeks after giving birth. Employee may return to work earlier after getting approval by a medical doctor. During maternity leave, the employee salary will be covered by the social insurance up to a limit of around 2/3 of the base salary.
- Short-term leave/ Long- term leave: Short-term leave and Long-term leave are not regulated by Labor law. It is a matter of agreement between the company and the employee. Usually employees can take unpaid short leave.
- Childcare leave: Childcare leave applies to both female and male employees. Childcare leave starts from the day after the maternity leave ends (i.e. 8 weeks after the birth date), to the day before the child reaches the age of 1. If the employee’s spouse is also on childcare leave, the childcare leave may be extended up to when the child reaches the age of 1 year and 2 months. The duration each parent may take childcare leave should not, however, exceed one year. During childcare leave, payment will be covered by the labor insurance.
- Additional paid day leave:
1) Leave due to death in the family
a) Death of a father, mother, spouse, or child: up to 5 days
b) Death of a grandparent, grandchild, sibling, child’s spouse, or spouse’s parent: up to 3 days.
2) Leave to attend Buddhist memorial services – 1 day
3) Leave for marriage – 5 days
4) Leave for jury service – the approved number of days
5) Public work leave – the approved number of days
Bonuses and special benefits: Seasonal bonuses are paid twice yearly (Summer and Winter bonuses) in Japan to salaried workers. The bonus amount varies from company to company and from year to year but is generally several months salary.
Termination of employment: When an employee is terminated, the Labor Standards Act requires the employer to pay wages due within 7 days. Severance pay is not mandated by law.
Workers’ compensation: Workers’ accident insurance is a government insurance program in Japan. It pays benefits to workers (or their survivors) if the insured worker suffers injury, illness, or death due to circumstances related to his or her work related duties or commuting. All companies that employ workers must provide this coverage. As of April 2012, the maximum premium rate is 10.3% (for construction work and the like) and the minimum is 0.3% (for work that is mostly clerical). 0.005% is added to the above premium to fund benefits for asbestos-induced diseases.
Record keeping: Japanese payroll reports must be kept for at least 40 years, while pay slips may be issued to employees online.
Foreign Workers in Japan
Visas: A visa must be applied for before an individual enters Japan. The type of visa required will depend on the purpose of the individual’s entry into Japan. Nationals of certain countries are allowed to enter Japan for up to 90 days without a visa.
- Working visa:
- Highly skilled professional
- Religious activities
- Business manager
- Legal/Accounting services
- Medical services
- Engineer/Specialist in humanities/International services
- Intra-company transferee
- Skilled labor
Taxes: Nonresidents are subject to income tax on their income from domestic sources. They are generally taxed at a flat rate of 20%, which is deducted at source. Foreign residents are also subject to the special reconstruction income tax of 0.42%.
In order to eliminate double taxation on income, taxpayers who pays foreign taxes, which are similar to Japanese income tax, may choose to have the amount of those foreign taxes credited against their Japanese income tax.
Japanese residents in the US: Japanese citizens which would like to travel to the US for 90 days or less for business-specific purposes don’t need to obtain a B-1 business visa. For longer stays more than 90 days, Japanese residents need to obtain a visa. Individuals may return to the US under the visa waiver program if a “reasonable length of time” has passed.
Japan has entered into more than 60 income tax treaties, including an income tax treaty and a totalization agreement for social tax coverage purposes with the United States. Learn more on the website of the Ministry of Finance Japan.
Planning expansion in Japan? You should prepare yourself for the cultural differences.
As Boye Lafayette De Mente said in “Etiquette Guide to Japan: Know the Rules that Make the Difference”, “Japan is an example of a country in which the code of social conduct became so formal … and important, that proper behavior became the paramount law of the land.”
The concept of wa or harmony lies at the heart of business meetings in Japan, and it is not recommended to offer strong opinions or cause confrontation which might upset the balance of wa. In order to maintain a sense of wa and build strong relationships, an understanding of Japanese culture is required.
Contact us today to learn more about Payslip’s global payroll services and how a Global Payroll Management Software can help your multinational organization with the etiquette and the specific rules for payroll and taxation in Japan.
- Wikipedia – “Japan”
- Wikipedia – “Workers’ accident compensation insurance (Japan)”
- The World Bank Group’s Doing Business 2019: Training for reform report
- Doing Business 2019 report: Japan
- World Business Culture: Doing Business in Japan
- Trading Economics: Japan Corporate Tax Rate
- Trading Economics: Japan Sales Tax Rate – Consumption Tax
- Deloitte: International Tax- Japan Highlights 2019
- KPMG: Japan Tax Profile
- KPMG: Employer social security tax rates
- Export to Japan – Employee Benefits in Japan
- American Express – Doing Business in Japan: 10 Etiquette Rules You Should Know
- Ministry of Foreign Affairs in Japan – Visa
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